If you’re planning to launch an ecommerce store and are wondering how much it will cost you to acquire new customers, you’re in the right place. Read on to discover how the customer acquisition cost (CAC) is calculated, the average CAC for ecommerce, and how you can reduce yours.
What Is the Customer Acquisition Cost?
The customer acquisition cost is the price tag associated with converting a potential customer into a buyer. This could include advertising, marketing, sales, and any other fees associated with acquiring customers.
For ecommerce businesses, CAC can be a bit more complex than traditional brick-and-mortar businesses because there are more touch-points involved in the customer journey.
A potential customer might see an ad for your product on Facebook, click through to your website, browse around for a while, add something to their cart, and then finally make a purchase.
Effective management of these touch-points is crucial, and utilizing comprehensive eCommerce support services can enhance the overall customer experience and streamline the path to purchase.
Each of these steps is considered a "touch-point" and can contribute to the customer's CAC.
In addition, each touch-point has its own associated costs. For example, the cost of hosting your website would be considered a tech expense, while the cost of buying the best website popup you can find would be considered a marketing expense.
The important thing to remember is that CAC includes all of the costs associated with acquiring customers, both direct and indirect.
What Is the Average CAC in Ecommerce?
The average CAC in ecommerce depends on the industry you’re looking at. Here are some CAC figures according to Shopify:
- Health and beauty: $127
- Arts and entertainment: $21
- Electronics: $377
- Food and beverages: $462
- Home and garden: $129
How Is Customer Acquisition Cost Calculated?
There are two main methods for calculating CAC: the top-down method and the bottom-up method.
The top-down method involves taking your total marketing and sales budget for a certain period of time (usually a year) and dividing it by the number of new customers acquired during that same time period.
For example, if your total marketing and sales budget for the year is $1 million and you acquire 1,000 new customers, your CAC would be $1,000.
The bottom-up method is a bit more complex and involves calculating the cost of each touch-point in the customer journey and then adding them all up.
For example, let's say you spend $100 on Facebook ads, $200 on website hosting, $300 on sales salaries, and $400 on miscellaneous expenses like office space and software in one month.
If you acquire 1,000 new customers during that month, your CAC would be ($100+$200+$300+$400)/1000 = $1.
Which method is better?
There's no right or wrong answer when it comes to choosing a calculation method for CAC, as it depends on your business and what information you're trying to glean from the calculation.
If you want a more accurate picture of your CAC, we recommend using the bottom-up method. This method will give you a granular look at the costs associated with each touch-point in the customer journey, which can be helpful for identifying areas of improvement.
On the other hand, the top-down method is a bit simpler and can be used to get a quick snapshot of your CAC. This method is best for businesses that are just starting out and don't have a lot of data to work with.
How Can You Reduce Your CAC?
There are a few different ways you can go about reducing your CAC. Let's take a look at two of the most effective methods.
Improve your marketing efforts
This could involve anything from optimizing your website for conversion to running targeted ad campaigns.
By doing things like A/B testing for your ads and webpages, you can ensure that you're getting the most bang for your buck and that your marketing efforts are as effective as possible.
In fact, this is evidence of how ecommerce websites differ from other websites, which are usually not focused on conversion.
Increase the lifetime value of your customers
Another great way to reduce CAC is to increase the lifetime value (LTV) of your customers. LTV is the total amount of revenue that a customer will generate over the course of their relationship with your business.
There are a few different ways you can increase LTV, but one of the most effective methods is to provide stellar customer service, which helps your customers want to stick around for longer and make repeat purchases.
